UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
[X]                   
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2021 or
 
[ ]
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ____ to ____.
 
Commission File No. 000-03978
 
UNICO AMERICAN CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Nevada
95-2583928
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
26050 Mureau Road, Calabasas, California
91302
(Address of Principal Executive Offices)
(Zip Code)
 
 Registrant's telephone number, including area code: (818) 591-9800
 
No Change
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, No Par Value
UNAM
The Nasdaq Global Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes X                   No __
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X    No__ 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.  
 
Large accelerated filer    ☐
Accelerated filer    ☐
 
Smaller reporting company    ☒
Non-accelerated filer    ☒
Emerging growth company    ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
Outstanding at May 17, 2021
Common Stock, no par value per share
5,304,885
 
 
 

 
 
 
UNICO AMERICAN CORPORATION
INDEX TO FORM 10-Q
 
 
 
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Form 10-Q, and the documents incorporated by reference in this document, the Company’s press releases and oral statements made from time to time by the Company or on the Company’s behalf, may contain “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (or “the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (or “the Exchange Act”). In this context, forward-looking statements are not historical facts and include statements about the Company’s plans, objectives, beliefs and expectations. Forward-looking statements include statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “can have,” “likely,” the negatives thereof or similar words and expressions. These forward-looking statements are contained throughout this Form 10-Q, including, but not limited to, statements found in Part I – Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Forward-looking statements are only predictions and are not guarantees of future performance. These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause the Company’s actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond the Company’s ability to control or predict. The Company’s actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. Such factors include, but are not limited to, the following:
 
 
● substantial historical net losses, which may continue in the future;
● failure to meet minimum capital and surplus requirements;
● vulnerability to climate change and significant catastrophic property loss;
● the impact of the recent coronavirus pandemic;
● ability to adjust claims accurately;
● insufficiency of loss and loss adjustment expense reserves to cover future losses;
● ability to realize deferred tax assets;
● the negative impact of emerging claim and coverage issues;
● ability to accurately underwrite risks and charge adequate premium;
● ability to obtain reinsurance or collect from reinsurers and or losses in excess of reinsurance limits;
● excess underwriting capacity and unfavorable premium rates;
● extensive regulation and legislative changes;
● risk management framework could prove inadequate;
● reliance on subsidiaries to satisfy obligations, including privacy and data protection laws;
● downgrade in financial strength rating or long-term issuer credit rating by A.M. Best;
● changes in interest rates;
● investments subject to credit, prepayment and other risks;
● geographic concentration;
● single operating location;
● reliance on independent insurance agents and brokers;
● insufficient reserve for doubtful accounts;
● litigation;
● enforceability of exclusions and limitations in policies;
● difficulty in acquiring necessary data;
● reliance on information technology systems;
● systems damage, failures, interruptions, cyber-attacks and intrusions, or unauthorized data disclosures;
● delays and cost overruns in connection with the upgrade of its legacy information technology system;
● ability to attract, develop and retain employees and maintain appropriate staffing levels;
● insolvency, financial difficulties, or default in performance of obligations by parties with significant contracts or
   relationships;
● ability to effectively compete;
● levy assessments by various underwriting pools and programs;
● maximization of long-term value which may sometimes conflict with short-term earnings expectations;
 
 
3
 
 
● control by a small number of stockholders;
● difficulty in effecting a change of control or sale of any subsidiaries;
● limited trading of stock;
● changes in accounting standards issued by the Financial Accounting Standards Board;
● changes in federal or state tax laws;
● ability to prevent or detect acts of fraud with disclosure controls and procedures;
● change in general economic conditions;
● dependence on key personnel;
no assurance of dividend declaration in the future so returns may be limited to stock value;
significant costs and substantial management time devoted to operating as a public company; and
● failure to maintain effective system of internal controls.
 
Please see Part I - Item 1A – “Risk Factors” in the Company’s 2020 Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”), as well as other documents we file with the SEC from time-to-time, for other important factors that could cause the Company’s actual results to differ materially from the Company’s current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-Q and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
 
 
4
 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
March 31
 
 
December 31
 
 
 
2021
 
 
 2020
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
Investments
 
 
 
 
 
 
   Available-for-sale:
 
 
 
 
 
 
     Fixed maturities, at fair value (amortized cost: $86,519,732 at
 
 
 
 
 
 
       March 31, 2021, and $80,071,280 at December 31, 2020)
 $88,550,354 
 $83,409,694 
   Held-to-maturity:
    
    
     Fixed maturities, at amortized cost (fair value: $798,000 at
    
    
       March 31, 2021, and $798,000 at December 31, 2020)
  798,000 
  798,000 
   Equity securities, at fair value (cost: $2,834,034 at March 31, 2021,
    
    
       and $2,548,440 at December 31, 2020)
  3,183,967 
  2,746,706 
   Short-term investments, at fair value
  2,949,946 
  200,000 
Total Investments
  95,482,267 
  87,154,400 
Cash and cash equivalents
  7,772,757 
  3,957,980 
Accrued investment income
  498,322 
  402,046 
Receivables, net
  3,586,912 
  3,321,337 
Reinsurance recoverable:
    
    
   Paid losses and loss adjustment expenses
  78,311 
  621,307 
   Unpaid losses and loss adjustment expenses
  22,133,366 
  22,253,642 
Deferred policy acquisition costs
  3,567,638 
  3,503,248 
Real estate held for sale, net
  - 
  8,335,017 
Property and equipment, net
  2,228,085 
  2,038,415 
Other assets
  254,999 
  313,363 
Total Assets
 $135,602,657 
 $131,900,755 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY
 
    
    
LIABILITIES
    
    
Unpaid losses and loss adjustment expenses
 $74,402,333 
 $74,893,509 
Unearned premium
  19,283,208 
  18,188,298 
Advance premium and premium deposits
  143,236 
  208,538 
Accrued expenses and other liabilities
  5,506,372 
  3,577,450 
Total Liabilities
 $99,335,149 
 $96,867,795 
 
    
    
Commitments and contingencies
    
    
 
    
    
STOCKHOLDERS' EQUITY
    
    

    
    
Common stock, no par value – authorized 10,000,000 shares; 5,304,885 shares issued and outstanding at March 31, 2021, and December 31, 2020
 $3,771,767 
 $3,771,767 
Accumulated other comprehensive income
  1,604,192 
  2,637,347 
Retained earnings
  30,891,549 
  28,623,846 
Total Stockholders’ Equity
 $36,267,508 
 $35,032,960 
 
    
    
Total Liabilities and Stockholders' Equity
 $135,602,657 
 $131,900,755 
 
See notes to condensed consolidated financial statements (unaudited).
 
 
 
5
 
 
UNICO AMERICAN CORPORATION
 AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
 Three Months Ended
 
 
 
 March 31
 
 
 
 2021
 
 
 2020
 
REVENUES
 
 
 
 
 
 
Insurance company operation:
 
 
 
 
 
 
     Net earned premium
 $6,603,760 
 $6,911,134 
     Net investment income
  514,723 
  520,692 
     Net realized investments gains
  55,399 
  1,114 
     Net realized gains on real estate sale
  3,693,858 
  - 
     Net unrealized investments gains (losses) on equity securities
  151,667 
  (44,800)
     Other income (loss)
  (26,752)
  80,937 
          Total Insurance Company Operation
  10,992,655 
  7,469,077 
 
    
    
Other insurance operations:
    
    
     Gross commissions and fees
  433,461 
  469,069 
     Finance charges and fees earned
  44,998 
  67,019 
     Other income
  540 
  16 
          Total Revenues
  11,471,654 
  8,005,181 
 
    
    
EXPENSES
    
    
Losses and loss adjustment expenses
  5,585,213 
  5,877,385 
Policy acquisition costs
  1,021,965 
  1,144,425 
Salaries and employee benefits
  1,128,090 
  1,122,499 
Commissions to agents/brokers
  20,568 
  25,955 
Other operating expenses
  1,173,479 
  980,415 
     Total Expenses
  8,929,315 
  9,150,679 
 
    
    
Income (Loss) before taxes
  2,542,339 
  (1,145,498)
Income tax benefit (expense)
  (274,636)
  101,672 
     Net Income (Loss)
 $2,267,703 
 $(1,043,826)
 
    
    
 
    
    
 
    
    
PER SHARE DATA:
    
    
Basic
    
    
  Income (Loss) Per Share
 $0.43 
 $(0.20)
  Weighted Average Shares
  5,304,885 
  5,306,720 
 
    
    
Diluted
    
    
  Income (Loss) Per Share
 $0.43 
 $(0.20)
  Weighted Average Shares
  5,304,885 
  5,306,720 
 
See notes to condensed consolidated financial statements (unaudited).
 
 
6
 
 
UNICO AMERICAN CORPORATION
 AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
 
 
Three Months Ended
 
 
 
March 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Net income (loss)
 $2,267,703 
 $(1,043,826)
Other changes in comprehensive income (loss):
    
    
     Changes in unrealized losses on securities classified as
        available-for-sale arising during the period, net of income tax
  (1,033,155)
  (299,993)
                Comprehensive Income (Loss)
 $1,234,548 
 $(1,343,819)
 
See notes to condensed consolidated financial statements (unaudited).
 
 
7
 
 
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
 
 
 
 Common Shares
 
 
Accumulated Other Comprehensive
 
 

 
 
 
 
 
 
Issued and Outstanding
 
 
Amount
 
 
Income
(Loss)
 
 
Retained Earnings
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance – December 31, 2019
  5,306,720 
 $3,772,669 
 $1,182,866 
 $50,124,790 
 $55,080,325 
 
    
    
    
    
    
Shares repurchased
  (978)
  (480)
  - 
  (5,760)
  (6,240)
Change in comprehensive loss,
net of deferred income tax
  - 
  - 
  (299,993)
  - 
  (299,993)
Net loss
  - 
  - 
  - 
  (1,043,826)
  (1,043,826)
Balance – March 31, 2020
  5,305,742 
 $3,772,189 
 $882,873 
 $49,075,204 
 $53,730,266 
 
 
 
 
 Common Shares
 
 
Accumulated Other Comprehensive
 
 

 
 
 
 
 
 
Issued and Outstanding
 
 
Amount
 
 
Income
(Loss)
 
 
Retained Earnings
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance – December 31, 2020
  5,304,885 
 $3,771,767 
 $2,637,347 
 $28,623,846 
 $35,032,960 
 
    
    
    
    
    
Change in comprehensive loss,
net of deferred income tax
  - 
  - 
  (1,033,155)
  - 
  (1,033,155)
Net income
  - 
  - 
  - 
  2,267,703 
  2,267,703 
Balance – March 31, 2021
  5,304,885 
 $3,771,767 
 $1,604,192 
 $30,891,549 
 $36,267,508 
 
 
See notes to condensed consolidated financial statements (unaudited).
 
 
8
 
 
UNICO AMERICAN CORPORATION
AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
 
Three Months Ended
 
 
 
March 31
 
 
 
2021
 
 
2020
 
Cash flows from operating activities:
 
 
 
 
 
 
   Net income (loss)
 $2,267,703 
 $(1,043,826)
   Adjustments to reconcile net income (loss) to net cash from operations:
    
    
      Depreciation and amortization
  105,373 
  188,085 
      Bond amortization, net
  (331,776)
  (6,711)
      Bad debt expense
  5,506 
  (25)
      Net realized investment gains
  (97,772)
  (1,114)
      Net realized gains on real estate sale
  (3,693,858)
  - 
      Net unrealized investment losses (gains) on equity securities
  (151,667)
  44,800 
   Changes in assets and liabilities:
    
    
      Net receivables and accrued investment income
  (367,356)
  (73,468)
      Reinsurance recoverable
  663,272 
  (353,724)
      Deferred policy acquisition costs
  (64,390)
  (68,385)
      Other assets
  58,364 
  (38,153)
      Unpaid losses and loss adjustment expenses
  (491,176)
  1,073,118 
      Unearned premiums
  1,094,910 
  297,061 
      Advance premium and premium deposits
  (65,302)
  125,944 
      Accrued expenses and other liabilities
  1,928,922 
  (48,814)
      Income taxes current/deferred
  274,636 
  (101,672)
Net Cash Provided (Used) by Operating Activities
  1,135,389 
  (6,884)
 
    
    
Cash flows from investing activities:
    
    
Purchase of fixed maturity investments
  (11,008,996)
  (1,735,823)
   Purchase of equity securities
  (285,594)
  (502,484)
Proceeds from maturity of fixed maturity investments
  3,491,804 
  1,328,128 
   Proceeds from sale or call of fixed maturity investments
  1,498,288 
  603,543 
Purchase of short-term investments
  (2,749,946)
  (1,202)
   Proceeds from sale of real estate held for sale
  12,028,875 
  - 
Purchase of property and equipment
  (295,043)
  (184,652)
Net Cash Provided (Used) by Investing Activities
  2,679,388 
  (492,490)
 
    
    
Cash flows from financing activities:
    
    
   Repurchase of common stock
  - 
  (6,240)
Net Cash Used by Financing Activities
  - 
  (6,240)
 
    
    
Net increase (decrease) in cash and cash equivalents
  3,814,777 
  (505,614)
Cash and cash equivalents at beginning of period
  3,957,980 
  5,781,639 
Cash and Cash Equivalents at End of Period
 $7,772,757 
 $5,276,025 
 
    
    
Supplemental cash flow information
    
    
Cash paid during the period for:
    
    
Interest
 $- 
 $- 
Income taxes
 $- 
 $8,800 
 
    
    
 
See notes to condensed consolidated financial statements (unaudited).
 
 
9
 
 
UNICO AMERICAN CORPORATION
 AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2021
 
 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Business
Unico American Corporation is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, and health insurance through its agency subsidiaries; and provides insurance premium financing and membership association services through its other subsidiaries. Unico American Corporation is referred to herein as the "Company" or "Unico" and such references include both the corporation and its subsidiaries, all of which are wholly owned. Unico was incorporated under the laws of Nevada in 1969.
 
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Quarterly condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s 2020 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Certain reclassifications have been made to prior period amounts to conform to current quarter presentation.
 
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect its reported amounts of assets and liabilities and its disclosure of any contingent assets and liabilities at the date of its financial statements, as well as its reported amounts of revenues and expenses during the reporting period. The most significant assumptions in the preparation of these condensed consolidated financial statements relate to losses and loss adjustment expenses. While every effort is made to ensure the integrity of such estimates, actual results may differ.
 
Fair Value of Financial Instruments
 
The Company employs a fair value hierarchy that prioritizes the inputs for valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques. (See Note 7.)
 
The Company has used the following methods and assumptions in estimating its fair value disclosures for instruments carried at fair value:
 
Available-for-sale fixed securities, equity securities, and short-term investments – Fair values are obtained from widely accepted third party vendors.
 
The Company has used the following methods and assumptions for estimating fair value for other financial instruments not carried at fair value:
 
Cash and cash equivalents – The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.
 
Long-term certificates of deposit – The carrying amounts reported in the Condensed Consolidated Balance Sheets for these instruments are at amortized cost which approximates their fair value.
 
 
10
 
 
Receivables, net – The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.
 
Accrued expenses and other liabilities – The carrying amounts reported in the Condensed Consolidated Balance Sheets approximate the fair values given the short-term nature of these instruments.
 
Cash Equivalents
 
 Cash equivalents are comprised of highly liquid investments with initial maturity of 90 days or less. Cash equivalents include, but not limited to, custodial trust, bank money market and savings accounts.
 
NOTE 2 – REPURCHASE OF COMMON STOCK – EFFECTS ON STOCKHOLDERS’ EQUITY
 
On August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock. The 2020 Program was effective immediately and replaced the Company’s existing share repurchase program that was adopted by the Board of Directors on December 19, 2008 (the “2008 Program”) to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. The purchases under the 2020 Program may be made from time to time in the open market, through block trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and in accordance with applicable laws, rules and regulations. The timing and actual number of the shares repurchased under the 2020 Program will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The Company intends to fund the share repurchases under the 2020 Program from cash on hand. The 2020 Program does not commit the Company to repurchase shares of its common stock and it may be amended, suspended or discontinued at any time. The Company repurchased its shares under the 2020 Program and 2008 Program in unsolicited transactions as follows:
 
 
 
Three Months Ended
March 31
 
 
 
2021
 
 
2020
 
2020 Program
 
 
 
 
 
 
Number of shares repurchased
  - 
  - 
Cost of shares repurchased
    
    
   Allocated to retained earnings
 $- 
 $- 
   Allocated to capital
  - 
  - 
      Total cost of shares repurchased
 $- 
 $- 
 
    
    
2008 Program
    
    
Number of shares repurchased
  - 
  978 
Cost of shares repurchased
    
    
   Allocated to retained earnings
 $- 
 $5,760 
   Allocated to capital
  - 
  480 
      Total cost of shares repurchased
 $- 
 $6,240 
 
The Company has remaining authority under the 2020 Program to repurchase up to $4,995,507 of the currently outstanding shares of the Company’s common stock as of March 31, 2021. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.
 
NOTE 3 – INCOME (LOSS) PER SHARE
 
The following table represents the reconciliation of the Company's basic income (loss) per share and diluted income (loss) per share computations reported on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020:
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
Basic Income (Loss) Per Share
 
 
 
 
 
Net income (loss)
 $2,267,703 
 $(1,043,826)
 
    
    
Weighted average shares outstanding
  5,304,885 
  5,306,720 
 
    
    
     Basic income (loss) per share
 $0.43 
 $(0.20)
 
 
11
 
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
Diluted Income (Loss) Per Share
 
 
 
 
 
 
Net income (loss)
 $2,267,703 
 $(1,043,826)
 
    
    
Weighted average shares outstanding
  5,304,885 
  5,306,720 
Effect of diluted securities
  - 
  - 
Diluted shares outstanding
  5,304,885 
  5,306,720 
 
    
    
     Diluted income (loss) per share
 $0.43 
 $(0.20)
 
Basic earnings per share exclude the impact of common share equivalents and are based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. When outstanding stock options are dilutive, they are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. In loss periods, stock options are excluded from the calculation of diluted loss per share, as the inclusion of stock options would have an anti-dilutive effect.
 
NOTE 4 – RECENTLY ISSUED ACCOUNTING STANDARDS
 
Recently adopted standards
 
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for assets and liabilities measured at fair value. The amendments in this ASU require certain existing disclosure requirements to be modified or removed, and certain new disclosure requirements to be added. In addition, this ASU allows entities to exercise more discretion when considering fair value measurement disclosures. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. The Company adopted ASU 2018-13 effective January 1, 2020. The adoption of ASU 2018-13 did not have a material impact to the Company’s disclosures.
 
In December of 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes or ASU 2019-12.  ASU 2019-12 is expected to reduce the cost and complexity related to the accounting for income taxes. The ASU removes specific exceptions to the general principles in Topic 740 and improves the financial statement preparer's application of income tax related guidance. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted ASU 2019-12 effective January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial statements.
 
Standards not yet adopted
 
In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will primarily impact the Company’s available-for-sale fixed maturities portfolio and reinsurance recoverables. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases.” ASU 2019-10 updated the effective date for implementing ASU 2016-13 for smaller reporting entities, and that effective date will be for fiscal years beginning after December 15, 2022. Since the Company’s fixed income portfolio is invested primarily in higher rated bonds and the reinsurance is purchased from financially strong reinsurers, the Company believes the adoption of ASU 2016-13 will not have a material impact to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets.
 
 
12
 
 
NOTE 5 – ACCOUNTING FOR TAXES
 
The Company and its wholly owned subsidiaries file consolidated federal and state income tax returns. Pursuant to a tax allocation agreement, the Company’s subsidiaries, Crusader Insurance Company (“Crusader”) and American Acceptance Corporation (“AAC”), are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2017 and California state income tax authorities for tax returns filed starting at taxable year 2016. There are no ongoing examinations of income tax returns by federal or state tax authorities.
 
As of March 31, 2021, and December 31, 2020, the Company had no unrecognized tax benefits or liabilities and, therefore, had not accrued interest and penalties related to unrecognized tax benefits or liabilities. However, if interest and penalties would need to be accrued related to unrecognized tax benefits or liabilities, such amounts would be recognized as a component of federal income tax expense.
 
As of March 31, 2021, the Company had deferred tax assets of $7,510,566 generated from $35,764,600 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,551,432 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its consolidated financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the three months ended March 31, 2021, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,346,084 that, in management’s judgment, are not more-likely-than-not to be realized. For the year ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,557,080.
 
As a California based insurance company, Crusader is obligated to pay a premium tax on gross premiums written in all states that Crusader is admitted. Premium taxes are deferred and amortized as the related premiums are earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.
 
NOTE 6 – REAL ESTATE HELD FOR SALE, NET AND PROPERTY AND EQUIPMENT, NET
 
Real estate held for sale consists of the following:
 
 
 
March 31
 
 
December 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Real estate held for sale, located in Calabasas, California
 $- 
 $10,202,676 
Accumulated depreciation and amortization
  - 
  (1,867,659)
        Real estate held for sale, net
 $- 
 $8,335,017 
 
Property and equipment consist of the following:
 
 
 
March 31
 
 
December 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Furniture, fixtures, equipment
  2,188,132 
  2,191,411 
Computer software
  466,892 
  467,275 
Accumulated depreciation and amortization
  (2,536,237)
  (2,423,617)
Computer software under development
  2,109,298 
  1,803,346 
Property and equipment, net
 $2,228,085 
 $2,038,415 
 
On February 12, 2021, the Company, through Crusader, completed the sale of the Company’s headquarters at 26050 Mureau Road, Calabasas, California 91302 (the “Calabasas Building”), for approximately $12,695,000 (the “Sale”) to Mureau Road, LLC (“Mureau Road”), a subsidiary of Alliant Capital, Ltd. (“Alliant”). Mureau Road and Alliant do not have any material relationship with the Company or its subsidiaries, other than through the Sale and the Lease (as defined below) transactions. The Company recognized a gain of $3,693,858 on the sale of the Calabasas Building.
 
 
13
 
 
On February 12, 2021, the Standard-Multi Tenant Office Lease – Net, dated January 28, 2021 (the “Lease”), by and between Crusader and Mureau Road became effective in connection with the completion of the Sale. The Company has agreed to a lease, which expires on January 31, 2022, with Alliant for the second floor of the Calabasas Building with an initial base rent of approximately $52,637 per month, where the Company will continue to operate its corporate headquarters.
 
Through the date of the real estate listing, depreciation on the Calabasas Building, owned by Crusader, is computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas Building is computed using the straight line method over 3 to 15 years. Amortization of leasehold improvements in the Calabasas Building is being computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Depreciation and amortization expense on all property and equipment for the three months ended March 31, 2021 and 2020 was $121,727 and $188,085, respectively.
 
For the three months ended March 31, 2021 and 2020, the Calabasas Building has generated rental revenue from non-affiliated tenants in the amount of $13,806 and $53,290, respectively, which is included in “Other income” from insurance company operation in the Company’s Condensed Consolidated Statements of Operations.
 
For the three months ended March 31, 2021 and 2020, the Calabasas Building incurred operating expenses (including depreciation) in the amount of $95,964 and $190,097, respectively, which are included in “Other operating expenses” in the Company’s Condensed Consolidated Statements of Operations.
 
The Company capitalizes certain computer software costs purchased from outside vendors for internal use or incurred internally to upgrade the existing systems. These costs also include configuration and customization activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrade and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. The capitalized costs are not depreciated until the software is placed into production.
 
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
In determining the fair value of its financial instruments, the Company employs a fair value hierarchy that prioritizes the inputs for the valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques as follows:
 
Level 1 – Financial assets and financial liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.
 
Level 2 – Financial assets and financial liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability as of the reporting date.
 
Level 3 – Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities as of the reporting date.
 
The hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) or unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability
 
The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, and are allocated among the three levels within the fair value hierarchy as of March 31, 2021, and December 31, 2020:
 
 
14
 
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
March 31, 2021
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
  Available-for-sale fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
    U.S. Treasury securities
 $10,883,041 
 $- 
 $- 
 $10,883,041 
    Corporate securities
  - 
  47,462,245 
  - 
  47,462,245 
    Agency mortgage-backed securities
  - 
  30,205,068 
  - 
  30,205,068 
Equity securities
  3,183,967 
  - 
  - 
  3,183,967 
Short-term investments
  2,949,946 
  - 
  - 
  2,949,946 
     Total financial instruments at fair value
 $17,016,954 
 $77,667,313 
 $- 
 $94,684,267 
 
    
    
    
    
 
    
    
    
    
December 31, 2020
    
    
    
    
Financial instruments:
    
    
    
    
  Available-for-sale fixed maturities:
    
    
    
    
    U.S. Treasury securities
 $10,832,181 
 $- 
 $- 
 $10,832,181 
    Corporate securities
  - 
  46,451,905 
  - 
  46,451,905 
    Agency mortgage-backed securities
  - 
  26,125,608 
  - 
  26,125,608 
Equity securities
  2,746,706 
  - 
  - 
  2,746,706 
Short-term investments
  200,000 
  - 
  - 
  200,000 
     Total financial instruments at fair value
 $13,778,887 
 $72,577,513 
 $- 
 $86,356,400 
 
Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2, and 3 of the fair value hierarchy during the three months ended March 31, 2021 and 2020.
    
As a result of the spread of the ongoing coronavirus (“COVID-19”) pandemic, economic uncertainties have arisen which can impact the fair value of investments, day-to-day administration of the business and premium volume. While the Company does not believe it is exposed to substantial risk from coronavirus-related claims under the insurance policies written by Crusader, it is possible that the fair value of its investment portfolio may be adversely affected by the general economic conditions as a result of the governmental responses to the pandemic.
 
NOTE 8 – INVESTMENTS
 
A summary of investment income, net of investment expenses, net realized investment gains, realized gains on real estate sale, and net unrealized investment gains on equity securities is as follows:
 
 
 
Three Months ended March 31
 
 
 
 2021
 
 
 2020
 
 
 
 
 
 
 
 
Fixed maturities
 $528,167 
 $542,407 
Equity securities
  20,753 
  1,442 
Short-term investments and cash equivalents
  384 
  11,722 
    Gross investment income
  549,304 
  555,571 
Less investment expenses
  (34,581)
  (34,879)
    Net investment income
  514,723 
  520,692 
Net realized investment gains
  55,399 
  1,114 
Net realized gains on real estate sale
  3,693,858 
  - 
Net unrealized investment gains (losses) on equity securities
  151,667 
  (44,800)
    Net investment income, realized investment gains, realized gains on real
    
    
      estate sale and unrealized investment gains (losses)
 $4,415,647 
 $477,006 
 
The amortized cost and estimated fair values of investments in fixed maturities by category are as follows:
 
 
15
 
 
 
 
 
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized Losses
 
 
 Estimated
Fair
Value
 
March 31, 2021
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
   U.S. Treasury securities
 $10,754,166 
 $180,757 
 $(51,882)
 $10,883,041 
   Corporate securities
  46,200,918 
  1,601,092 
  (339,765)
  47,462,245 
   Agency mortgage-backed securities
  29,564,648 
  705,489 
  (65,069)
  30,205,068 
Held-to-maturity fixed securities:
    
    
    
    
   Certificates of deposits
  798,000 
  - 
  - 
  798,000 
     Total fixed maturities
 $87,317,732 
 $2,487,338 
 $(456,716)
 $89,348,354 
 
 
 
 
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized Losses
 
 
 Estimated
Fair
Value
 
December 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
   U.S. Treasury securities
 $10,596,808 
 $235,373 
 $- 
 $10,832,181 
   Corporate securities
  44,159,926 
  2,347,826 
  (55,847)
  46,451,905 
   Agency mortgage-backed securities
  25,314,546 
  833,336 
  (22,274)
  26,125,608 
Held-to-maturity fixed securities:
    
    
    
    
   Certificates of deposits
  798,000 
  - 
  - 
  798,000 
     Total fixed maturities
 $80,869,280 
 $3,416,535 
 $(78,121)
 $84,207,694 
 
As of March 31, 2021, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“USIC”) and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $821,000 and $788,858 on March 31, 2021, respectively.
 
A summary of the unrealized gains (losses) on investments in fixed maturities carried at fair value and the applicable deferred federal income taxes are shown below:
 
 
 
March 31
 
 
December 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Gross unrealized gains on fixed maturities
 $2,487,338 
 $3,416,535 
Gross unrealized losses on fixed maturities
  (456,716)
  (78,121)
  Net unrealized gains on fixed maturities
  2,030,622 
  3,338,414 
Deferred federal tax expense
  (426,430)
  (701,067)
  Net unrealized gains, net of deferred income taxes
 $1,604,192 
 $2,637,347 
 
A summary of estimated fair value, gross unrealized losses, and number of securities in a gross unrealized loss position by the length of time in which the securities have continually been in that position is shown below:
 
 
 
Less than 12 Months
 
 
12 Months or Longer
 
 
 
 
Estimated
Fair Value
 
 
Gross Unrealized
Losses
 
 
 
Number of Securities
 
 
 
Estimated
Fair Value
 
 
Gross Unrealized
Losses
 
 
 
Number of Securities
 
March 31, 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 $3,691,882 
 $(51,882)
  3 
 $- 
 $- 
  - 
Corporate securities
  9,841,887 
  (320,480)
  14 
  891,000 
  (19,285)
  1 
Agency mortgage-backed securities
  7,990,649 
  (65,069)
  11 
  - 
  - 
  - 
          Total debt securities
  21,524,418 
  (437,431)
  28 
  891,000 
  (19,285)
  1 
Equity securities
  608,807 
  (24,884)
  34 
  10,972 
  (749)
  2 
           Total
 $22,133,225 
 $(462,315)
  62 
 $901,972 
 $(20,034)
  3 
 
 
16
 
 
 
 
Less than 12 Months
 
 
12 Months or Longer
 
 
 
 
Estimated
Fair Value
 
 
Gross Unrealized
Losses
 
 
 
Number of Securities
 
 
 
Estimated
Fair Value
 
 
Gross Unrealized
Losses
 
 
 
Number of Securities
 
December 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
  2,101,986 
  (55,847)
  2 
  - 
  - 
  - 
Agency mortgage-backed securities
  3,223,329 
  (22,274)
  12 
  - 
  - 
  - 
           Total debt securities
  5,325,315 
  (78,121)
  14 
  - 
  - 
  - 
Equity securities
  723,346 
  (37,357)
  25 
  - 
  - 
  - 
           Total
 $6,048,661 
 $(115,478)
  39 
 $- 
 $- 
  - 
 
The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Condensed Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses on all securities as of March 31, 2021, and December 31, 2020, were determined to be temporary.
 
Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity. The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows:
 
 
 
Three Months Ended
March 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Fixed maturities securities sold
 
 
 
 
 
 
Number of securities sold
  1 
  1 
Amortized cost of sold securities
 $249,995 
 $601,316 
Realized gains on sales
 $2 
 $1,114 
 
    
    
Fixed maturities securities called
    
    
Number of securities called
  2 
  - 
Amortized cost of called securities
 $1,374,901 
 $- 
Realized gains on calls
 $99 
 $- 
 
The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect.
 
The Company started investing in common stock equity securities during the year ended December 31, 2020. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. A summary of equity securities is shown below:
 
 
 
March 31
 
 
December 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Cost
 $2,834,034 
 $2,548,440 
Unrealized gains
  349,933 
  198,266 
  Fair market value of equity securities
 $3,183,967 
 $2,746,706 
 
The Company’s investment in certificates of deposit included $598,000 of brokered certificates of deposit as of March 31, 2021 and December 31, 2020.
 
The following securities from three different banks represent statutory deposits that are assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission to transact insurance business in the state of Nevada.
 
 
17
 
 
 
 
March 31
 
 
December 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Certificates of deposit
 $200,000 
 $200,000 
Short-term investments
  200,000 
  200,000 
  Total state held deposits
 $400,000 
 $400,000 
 
All the Company’s brokered and non-brokered certificates of deposit are within the FDIC insured permissible limits. Due to nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.
 
Short-term investments have an initial maturity of one year or less and consist of the following:
 
 
 
March 31
 
 
December 31
 
 
 
2021
 
 
2020
 
  U.S. Treasury bills
 $2,749,946 
 $- 
  Certificates of deposit
  200,000 
  200,000 
     Total short-term investments
 $2,949,946 
 $200,000 
 
NOTE 9 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
 
The following table provides an analysis of Crusader’s loss and loss adjustment expense reserves, including a reconciliation of the beginning and ending balance sheet liability for the periods indicated:
 
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Reserve for unpaid losses and loss adjustment expenses
  at January 1 – gross of reinsurance
 $74,893,509 
 $55,066,480 
Less reinsurance recoverable on unpaid losses and loss
     adjustment expenses
  22,253,642 
  14,725,855 
Reserve for unpaid losses and loss adjustment expenses
  at January 1 – net of reinsurance
  52,639,867 
  40,340,625 
Incurred losses and loss adjustment expenses:
    
    
   Provision for insured events of current year
  6,757,564 
  5,161,176 
   Development of insured events of prior years
  (1,172,351)
  716,209 
       Total incurred losses and loss adjustment expenses
  5,585,213 
  5,877,385 
Loss and loss adjustment expense payments:
    
    
   Attributable to insured events of the current year
  2,545,181 
  1,444,009 
   Attributable to insured events of prior years
  3,410,932 
  4,034,155 
       Total payments
  5,956,113 
  5,478,164 
Reserve for unpaid losses and loss adjustment expenses
     at March 31 – net of reinsurance
  52,268,967 
  40,739,846 
Reinsurance recoverable on unpaid losses and loss
     adjustment expenses
  22,133,366 
  15,399,752 
Reserve for unpaid losses and loss adjustment expenses at
     March 31 – gross of reinsurance
 $74,402,333 
 $56,139,598 
 
Some lines of insurance are commonly referred to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance in which claims are settled relatively quickly are called "short-tail" lines. It is generally more difficult to estimate loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final disposition and the difficulty of estimating the settlement value of the claim. Crusader’s short-tail lines consist of its property coverages, and its long-tail lines consist of its liability coverages. However, Crusader’s long-tail liability claims tend to be settled relatively quicker than other long-tail lines not underwritten by Crusader, such as workers’ compensation, professional liability, umbrella liability, and medical malpractice.
 
 
18
 
 
NOTE 10 – CONTINGENCIES
 
The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings as either plaintiff or defendant. From time to time, the Company is required to resort to legal proceedings against vendors providing services to the Company or against customers or their agents to enforce collection of premiums, commissions, or fees. These routine items of litigation do not materially affect the Company and are handled on a routine basis by the Company through its counsel.
 
Crusader is also subject to regulatory and governmental examinations, requests for information, inquiries, investigations, and threatened legal actions and proceedings by state regulators and others. Crusader receives numerous requests, orders for documents, and information in connection with various aspects of its regulated activities. Regulatory and governmental requests for information, inquires, certain examinations and investigations are routinely handled by Crusader. Crusader may involve outside counsel in regulatory matters depending on the nature of the matter.
 
The Company establishes reserves for lawsuits, regulatory actions, and other contingencies for which the Company is able to estimate its potential exposure and believes a loss is probable. For loss contingencies believed to be reasonably possible, the Company discloses the nature of the loss contingency, an estimate of the possible loss, a range of loss, or a statement that such an estimate cannot be made.
 
Likewise, the Company is sometimes named as a cross-defendant in litigation, which is principally directed against an insured who was issued a policy of insurance directly or indirectly through Crusader. Incidental actions related to disputes concerning the issuance or non-issuance of individual policies are sometimes brought by customers or others. These items are also handled on a routine basis by counsel, and they do not generally affect the operations of the Company. Management is confident that the ultimate outcome of pending litigation should not have an adverse effect on the Company's consolidated results of operations or financial position. The Company vigorously defends itself unless a reasonable settlement appears appropriate.
 
Crusader has received a number of coronavirus-related business interruption claims. With an exception of a handful of claims for which investigation is still ongoing, all such claims were denied after the individual circumstances of each claim were reviewed to determine whether insurance coverage applied. Like many companies in the property casualty insurance industry, Crusader was named as defendant in lawsuits seeking insurance coverage under the policies issued by Crusader for alleged economic losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages.
 
Crusader denies the allegations in these lawsuits and intends to continue to vigorously defend them. Although the policy terms vary in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss, such as fire or water damage, to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. Most of Crusader’s policies also contain an exclusion for losses caused directly or indirectly by “virus or bacteria.”
 
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case. These lawsuits are in the early stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts. Some early decisions on motion filings have been appealed.
 
On March 23, 2021, ten policyholders sued Crusader in a putative class action entitled Anchors & Whales LLC et al. v. Crusader Insurance Company, Superior Court of the State of California for the County of San Francisco (CGC-21-590999).  The action alleges that Crusader wrongly denied claims for business interruption coverage made by bars and restaurants related to the COVID-19 pandemic and related government orders that limited or halted operations of bars and restaurants.  The action further alleges that Crusader acted unreasonably in denying the claims, and it seeks as damages the amounts allegedly due as contract benefits under the insurance policies, attorneys’ fees and costs, punitive damages, and other unspecified damages.  The lawsuit alleges a putative class of all bars and restaurants in California that were insured by Crusader for loss of business income, who made such a claim as a result of “one or more Governmental Orders and the presence of the COVID-19 virus on the property,” and whose claim was denied by Crusader.  The Company intends to contest the allegations and to contest certification of any class. Due date for the Company’s answer is May 20, 2021.
 
 
19
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
 
General
 
Unico American Corporation, referred to herein as the "Company” or “Unico," is an insurance holding company. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property and casualty insurance, the Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provide marketing and various underwriting support services related to property, casualty, health and life insurance, the Company’s subsidiary American Acceptance Company (“AAC”) provides insurance premium financing, and the Company’s subsidiary Insurance Club, Inc., dba AAQHC (“AAQHC”), an Administrator provides membership association services.
 
Total revenues for the three months ended March 31, 2021, were $11,471,654 compared to $8,005,181 for the three months ended March 31, 2020, an increase of $3,466,473 (43%). The Company had net income of $2,267,703 for the three months ended March 31, 2021, compared to net loss of $1,043,826 for the three months ended March 31, 2020, an increase in net income of $3,311,529. On February 12, 2021, the Company, through Crusader, completed the sale of the Company’s headquarters at 26050 Mureau Road, Calabasas, California 91302, for approximately $12,695,000 (the “Sale”). The Company recognized a gain of $3,693,858 on the sale of the building. The increase in net income was primarily due to the realized gain on this sale.
 
This overview discusses some of the relevant factors that management considers in evaluating the Company's performance, prospects, and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety of the management discussion and analysis, the Company's consolidated financial statements and notes thereto, and all other items contained within the Company’s 2020 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
 
As a result of the spread of the ongoing coronavirus (“COVID-19”) pandemic, economic uncertainties have arisen which can impact the fair value of investments, day-to-day administration of the business and premium volume. While the Company does not believe it is exposed to substantial risk from coronavirus-related claims under the insurance policies written by Crusader, it is possible that the Company’s results of operations, financial condition and the fair value of its investment portfolio may be adversely affected by the general economic conditions as a result of the governmental responses to the pandemic.
 
The effects of the ongoing COVID-19 pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the three months ended March 31, 2020, however, the investment portfolio recovered in value in subsequent quarters. The governmental response to the pandemic contributed to the recent decline in investment yields, compared to the previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.
 
Crusader has received a number of coronavirus-related business interruption claims. With an exception of a handful of claims for which investigation is still ongoing, all such claims were denied after the individual circumstances of each claim were reviewed to determine whether insurance coverage applied. Like many companies in the property casualty insurance industry, Crusader was named as defendant in lawsuits seeking insurance coverage under the policies issued by Crusader for alleged economic losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages.
 
Crusader denies the allegations in these lawsuits and intends to continue to vigorously defend them. Although the policy terms vary in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss, such as fire or water damage, to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. Most of Crusader’s policies also contain an exclusion for losses caused directly or indirectly by “virus or bacteria.”
 
 
20
 
 
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case. These lawsuits are in the early stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts. Some early decisions on motion filings have been appealed.
 
On March 23, 2021, ten policyholders sued Crusader in a putative class action entitled Anchors & Whales LLC et al. v. Crusader Insurance Company, Superior Court of the State of California for the County of San Francisco (CGC-21-590999).  The action alleges that Crusader wrongly denied claims for business interruption coverage made by bars and restaurants related to the COVID-19 pandemic and related government orders that limited or halted operations of bars and restaurants.  The action further alleges that Crusader acted unreasonably in denying the claims, and it seeks as damages the amounts allegedly due as contract benefits under the insurance policies, attorneys’ fees and costs, punitive damages, and other unspecified damages.  The lawsuit alleges a putative class of all bars and restaurants in California that were insured by Crusader for loss of business income, who made such a claim as a result of “one or more Governmental Orders and the presence of the COVID-19 virus on the property,” and whose claim was denied by Crusader.  The Company intends to contest the allegations and to contest certification of any class. Due date for the Company’s answer is May 20, 2021.
 
While the coronavirus pandemic is also affecting the Company’s internal operations, the Company implemented a plan at the onset of the COVID-19 pandemic to help its operations continue effectively during the ongoing pandemic, including processes to limit the spread of COVID-19 among employees. For example, the Company modified its business practices in accordance with social distancing and safety guidelines, allowing many work-from-home arrangements, flexible work schedules, and restricted business travel. The Company’s employees are following the guidelines and approximately 75% are working from their homes. The Company will follow governmental safety guidelines in determining on when to remove the coronavirus-related business restrictions and on when to allow the employees working from their homes to return to their workplaces; at this point, the Company does not have an estimate on when these changes will occur. While the pandemic has created new challenges for the Company, the Company’s ability to maintain its operations, internal controls and relationships has not been adversely affected.
 
The Company’s financial performance suffered in recent years, reporting net losses for each fiscal year beginning with the year ended December 31, 2015. While losses in recent years have been driven primarily by losses from Crusader’s policies and their high loss ratios, management believes that other contributing factors include (1) the growth of some of the Company’s non-routine expenses relative to flat or declining revenues, (2) the failure to have replaced or upgraded the Company’s legacy IT system in order to process Crusader’s smaller premium accounts more efficiently, and (3) the failure to have shifted focus to larger premium accounts and fee-for-service operations.
 
In light of the challenges faced and operational results, the Company has taken several steps to improve its results. To improve revenues the Company is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously served, and to generate new sources of revenue on a fee-for-service basis. For example, the Company also re-activated its US Risk Managers, Inc. subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company.
 
On November 24, 2020, United Specialty Insurance Company (“USIC”) and certain Company’s subsidiaries entered into the following agreements pursuant to which USIC will underwrite property and casualty insurance policies on a surplus lines basis by and through Unifax and such policies will be reinsured by Crusader:
 
USIC and Crusader entered into a Quota Share Reinsurance Agreement, effective April 1, 2020, (the “Reinsurance Agreement”), pursuant to which Crusader will reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax for property, general liability, CMP property, CMP liability and other miscellaneous coverages, subject to certain maximum policy limits. Policies placed with USIC by Unifax and reinsured with Crusader from April 1, 2020, to November 24, 2020, remain in place without interruption or change and are subject to the Reinsurance Agreement.
 
 
21
 
 
USIC and Unifax entered into a Surplus Line Broker Agreement, effective April 1, 2020 (the “Broker Agreement”), pursuant to which USIC authorized Unifax to act as its broker and agent for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the Reinsurance Agreement. Under the Broker Agreement, Unifax is entitled to retain a commission for policies produced based on a percentage of the premiums on business placed with USIC. Unifax has agreed to indemnify and hold USIC harmless from any losses relating to the Broker Agreement.
 
USIC and U.S. Risk Managers, Inc. (“U.S. Risk”) entered into a Claims Administration Agreement, effective as of April 1, 2020 (the “Claims Administration Agreement”). Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk, which is a licensed claims adjuster in the state of California, to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the Reinsurance Agreement. U.S. Risk will be paid a fee by Unifax on behalf of USIC based on a percentage of earned premium. U.S. Risk has agreed to indemnify and hold USIC harmless from any losses relating to the Claims Administration Agreement.
 
In 2018, the Company determined that the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system to an IBM platform. While initially expected to be completed by the end of 2019, at a cost of approximately $300,000, excluding costs of Unico’s employees involved in the upgrade, the system upgrade was completed at the end of the first quarter of 2021 at a cost of approximately $1,500,000, excluding costs of Unico’s employees involved in the upgrade, due to unexpected technical challenges. The Company is exploring options to further modernize the system to improve its external producers’ experience and to enhance efficiency of its operations. In light of the significant delays and increases in cost associated with its legacy upgrade project, the Company deployed additional resources toward the management of this project and had renegotiated the relationship that it has with the non-affiliated vendor working on this project.
 
Revenue and Income Generation
 
The Company receives its revenues primarily from earned premium derived from the insurance company operations, commission and fee income generated from the insurance agency operations, finance charges and fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation, excluding the gain on real estate sale, generated approximately 94% and 93% of consolidated revenues for the three months ended March 31, 2021 and 2020, respectively. None of the Company’s other operations is individually material to consolidated revenues.
 
Insurance Company Operation
 
As of March 31, 2021, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until September 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (100% and 99.9% of direct written premium (before reinsurance ceded) during the three months ended March 31, 2021 and 2020, respectively). During the three months ended March 31, 2021 and 2020, approximately 99.5% and 98.6%, respectively of Crusader’s business was commercial multiple peril (“CMP”) policies.
 
Crusader’s total gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties), as reported on Crusader’s statutory financial statements, was produced geographically as follows:
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
California
 $10,482,545 
 $9,195,864 
 $1,286,681 
Arizona
  - 
  11,022 
  (11,022)
   Total gross written premium
 $10,482,545 
 $9,206,886 
 $1,275,659 
 
Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in three underwriting verticals: (1) Transportation, (2) Mainstreet, and (3) Buildings. The Company reorganized its underwriting verticals for proper staffing and business focus. The former Food, Beverage and Entertainment and Garage and Mercantile verticals became Mainstreet, and Apartments was transformed into Buildings. Crusader also is evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so as to offer similar products in other states, but the timing of any such expansion is not yet determined.
 
 
22
 
 
Written premium is a non-GAAP financial measure that is defined, under statutory accounting principles (“SAP”), as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies. Written premium is a required statutory measure. Written premium is defined under GAAP in Accounting Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.” Earned premium, the most directly comparable GAAP measure to written premium, represents the portion of written premium that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the terms of the policies. Written premium is intended to reflect production levels and is meant as supplemental information and not intended to replace earned premium. Such information should be read in connection with the Company’s GAAP financial results.
 
The following is a reconciliation of gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) to net earned premium (after premium ceded to reinsurers under reinsurance treaties):
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Direct written premium
 $10,176,863 
 $9,206,886 
Assumed written premium
  305,682 
  - 
   Less: written premium ceded to reinsurers
  (2,779,992)
  (1,979,127)
Net written premium
  7,702,553 
  7,227,759 
Change in direct unearned premium
  (883,694)
  (297,061)
Change in assumed unearned premium
  (211,216)
  - 
Change in ceded unearned premium
  (3,883)
  (19,564)
   Net earned premium
 $6,603,760 
 $6,911,134 
 
The insurance company operation underwriting profitability is defined by pre-tax underwriting gain, which is calculated as net earned premium less losses and loss adjustment expenses and policy acquisition costs.
 
Crusader’s underwriting loss before income taxes is as follows:
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
Net written premium
 $7,702,553 
 $7,227,759 
 $474,794 
Change in net unearned premium
  (1,098,793)
  (316,625)
  (782,168)
Net earned premium
  6,603,760 
  6,911,134 
  (307,374)
Less:
    
    
    
Losses and loss adjustment expenses
  5,585,213 
  5,877,385 
  (292,172)
Policy acquisition costs
  1,021,965 
  1,144,425 
  (122,460)
     Total underwriting expenses
  6,607,178 
  7,021,810 
  (414,632)
       Underwriting loss before income taxes
 $(3,418)
 $(110,676)
 $107,258 
 
Underwriting gain or loss before income taxes is a non-GAAP financial measure. Underwriting gain or loss before income taxes represents one measure of the pretax profitability of the insurance company operation and is derived by subtracting losses and loss adjustment expenses, and policy acquisition costs from net earned premium, which are all GAAP financial measures. Management believes disclosure of underwriting income or loss before income taxes is useful supplemental information that helps align the reader’s understanding with management’s view of insurance company operations profitability. Each of these captions is presented in the Condensed Consolidated Statements of Operations but is not subtotaled.
 
The following is a reconciliation of Crusader’s underwriting loss before income taxes to the Company’s income (loss) before taxes:
 
 
23
 
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Underwriting loss before income taxes
 $(3,418)
 $(110,676)
Insurance company operation revenues:
    
    
   Net investment income
  514,723 
  520,692 
   Net realized investment gains
  55,399 
  1,114 
   Net realized gains on real estate sale
  3,693,858 
  - 
   Net unrealized investment gains (losses) on equity securities
  151,667 
  (44,800)
   Other income (loss)
  (26,752)
  80,937 
Other insurance operations revenues:
    
    
   Gross commissions and fees
  433,461 
  469,069 
   Finance charges and fees earned
  44,998 
  67,019 
   Other income
  540 
  16 
Less expenses:
    
    
   Salaries and employee benefits
  1,128,090 
  1,122,499 
   Commissions to agents/brokers
  20,568 
  25,955 
   Other operating expenses
  1,173,479 
  980,415 
      Income (loss) before taxes
 $2,542,339 
 $(1,145,498)
 
Unearned premiums represent premium applicable to the unexpired terms of policies in force. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset by net investment income to related unearned premiums. To the extent that any of the Company’s programs become unprofitable, a premium deficiency reserve may be required. The Company recognized a premium deficiency of $150,000 as of March 31, 2021. The Company did not carry a premium deficiency reserve as of March 31, 2020. The premium deficiency was recorded as a reduction in deferred policy acquisition costs.
 
The following table shows the loss ratios, expense ratios, and combined ratios of Crusader:
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
 
 
 
 
 
 
 
Loss ratio (1)
  85%
  85%
Expense ratio (2)
  31%
  37%
Combined ratio (3)
  116%
  122%
 
(1) Loss ratio is defined as losses and loss adjustment expenses divided by net earned premium.
 
(2) Expense ratio is defined as a sum of policy acquisition costs and portions of indirect salaries and employee benefits and other operating expenses allocation to the insurance company operations, reduced by allocation of gross commissions and fees and other income, divided by net earned premium.
 
(3) Combined ratio is defined as a sum of loss ratio and expense ratio.
 
The following table provides an analysis of losses and loss adjustment expenses:
 
 
 
Three Months Ended March 31
 
 
 
2021
 
 
2020
 
 
 Change
 
Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
  Provision for insured events of current year
 $6,757,564 
 $5,161,176 
 $1,596,388 
  Development of insured events of prior years
  (1,172,351)
  716,209 
  (1,888,560)
     Total losses and loss adjustment expenses
 $5,585,213 
 $5,877,385 
 $(292,172)
 
For further analysis of losses and loss adjustment expenses, refer to “Results of Operations”.
 
On February 5, 2021, A.M. Best Company revised the outlooks to negative from stable and affirmed the FSR of B++ (Good) and Long-Term ICR of “bbb” of Crusader. Additionally, A.M. Best has revised the outlook to negative from stable and affirmed the Long-Term ICR of “bb” of the Company. Crusader is a wholly owned subsidiary of the Company.
 
 
24
 
 
The negative outlooks capture A.M. Best’s concerns with Crusader’s declining underwriting performance, the Company’s overall capitalization and the execution risk associated with implementing strategic operating changes to address these conditions.
 
The Long-Term ICRs reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.
 
Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings may have a negative impact on the Company’s revenue and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” FSR from A.M. Best.
 
The reinsurance arrangement with USIC allows Unifax to offer its customers policies written on USIC paper, which has A.M. Best FSR of “A,” when such rating is required.
 
The property and casualty insurance business is cyclical in nature. The conditions of a “soft market” include premium rates that are stable or falling and insurance is readily available. Contrarily, “hard market” conditions occur during periods in which premium rates rise and coverage may be more difficult to find. The Company believes that the California property and casualty insurance market is relatively mature and intensely competitive, with different products in different stages of the soft/hard market cycle at any given time.